Golden Ocean Group Limited

Good afternoon ladies and gentlemen and welcome to this conference call presenting GoldenOcean's Q3 results. Thank you very much for listening in. Today's call is the same procedure as usual. Peter Simonsen sitting next to me, the company's CFO, will talk us through some of the financial highlights and hereafter I will be discussing the market and the outlook for the company. In the next 15 to 20 minutes we will show you that despite macroeconomic factors presenting a challenging backdrop, Golden Ocean generated solid results in the third quarter, that we continue to divest non-core and older tonnage, taking advantage of firm asset prices, and that, despite an expected slowdown at the beginning of next year, the long-term dry bulk fundamentals remain strong. With that, let's take a look at the main highlights for the quarter. In Q3, we recorded and adjusted EBITDA of 118 million, which resulted in a net profit of 105 million or 52 cents per share. We achieved average TCE rates of 22.5 per day for our CAPE sizes and 23.5 for the Panamaxes. Like in Q1 and Q2, these earnings are well above benchmark indices. For the CAPEs, it is $9,000 per day per vessel better than the index. The premium is driven by scrubbers and a modern fuel-efficient fleet. Looking at this quarter, Q4, we have so far secured $23,000 per day for 75% of our Cape Days and $19,000 per day for 78% of our Panamax Days. Looking into Q1 next year, we have secured $21,000 per day for 4% of our Cape Days and $21,000 per day for 20% of our Panamax Days. We also completed the sale of two Ultramax vessels, which are outside our core segments, with a profit of $22 million. During the quarter, we also announced a share buyback program of up to $100 million. And finally, we announced our seventh consecutive quarterly dividend. We will pay out $0.35 per share. The dividend underlines our belief in the long-term fundamentals and takes the dividend we have paid since 2021 to almost $800 million. Now I'll pass the word to Peter, who will dive into some of the numbers and financial details of the quarter. Thank you, Ulrik.

If we move to slide five, we can have a look at our P&L for the quarter. Our time charter revenues was impacted by solid contract coverage and strong chartering performance in a volatile freight rate and fuel price environment. Our total fleet-wide TCE rate came in at 23,000 down from 29,400 in Q2. We had six ships dry docked in Q3 versus one ship dry docked in Q2, resulting in approximately 272 days of fire versus 187 in Q2. This resulted in TCE revenues of 195.6 million, compared to 250 million in the second quarter. On our operating expenses, we recorded 59.3 million versus 50.4 million, which, as mentioned, was a result of the increase in number of ships dry docked and also installation of energy saving devices and sensors of approximately 2 million in the quarter. We saw lower COVID-19 related costs as costs relating to quarantine hotels and testing has been lower while we see freight costs on spares and have increased quite a bit in the quarter. Our operating expenses excluding dry dock was 6,200 compared to 5,800 in Q2, while dry dock constituted $800 per day versus $74 per day in the last quarter. Our general and administrative expenses ended at 4.8 million, which is down from 5.5 million, and constituting $529 per day net of recharge. Our charter hire expenses increased due to higher trading activity during the quarter, ending at 19.2 million, up from 15.4 million in Q2. Our adjusted EBITDA ended at 118.2 million versus 191.6 million in the second quarter. Moving to financial expenses, we have seen the higher reference rates, being LIBOR and SOFR, impacting both our interest rate expense and income. And the net financial expenses ended at 14.4 million versus 11.9 million in the second quarter. Moving to derivatives and other financial income, we recorded a gain of 17.3 million compared to a gain of 19.9 million in the second quarter most notable we saw derivative portfolio which is a portfolio of interest rate swaps ffa and bunker derivatives a recorded gain of 11.4 million purchased 7.1 million in the second quarter in addition we saw results from investments in associates come in with a gain of 5.1 9 million versus 12.7 million in Q2, which relates to our investments in Swiss Marine, TFG, and UFC. Our net profit came in at 104.6 million, or 52 cents per share, and a dividend of 35 cents was declared for the quarter. Moving to our cash flow on slide six, we recorded a net decrease in cash of 36.1 million, We had the cash flow from operation of 98.7 million down from 155.5 million in Q2. We saw cash flow used in financing of 171.3, which is the aggregate of dividend payments pertaining to the second quarter of 120.5 million. Debt and lease repayments of 50.8 million, which included 20 million in extraordinary debt repayment relating to the sale of the two Ultramax vessels mentioned before. We saw cash flow provided by investments of 36.6 million, which is the sales proceeds of the two Ultramax vessels of 61.7 million net. and payment of new building installments of 23.9 million. Moving to slide seven, our balance sheet. We had cash on our balance sheet of 132.3 million at the end of the third quarter, which included 3 million in restricted cash securing our derivatives portfolio. In addition to that, we have 100 million in ungrown available credit lines at quarter end. Our debt and lease liabilities totaled 1.3 billion at the end of the quarter, and our average fleet-wide loan-to-value on the company's credit facilities was 42% at the end of the quarter versus 37% at the end of the second quarter. Our book equity was 1.9 billion and a ratio of equity to total assets of approximately 58% at the end of the third quarter. With that, I give the word back to Ulrik.

Thank you. Let's start off with a quick review of the market developments in Q3. In the third quarter, the Panamax market stayed firm, not as good as Q2, but still averaging $17,000 per day. The Panama market was mainly driven by healthy coal demand and new trade routes emerging from the Russian invasion of Ukraine, including the UN grains corridor. The Cape market has suffered this year, with the main culprits being the unwinding of congestion in China and the weak Brazilian iron ore export. Those factors continue to suppress the CAPE market through most of July and August before we saw a recovery in early September. However, overall CAPE rates did disappoint and averaged only $9,000 per day. A war in Ukraine, an energy crisis and central banks moving to tighten monetary policies mean that the world is facing new challenges in the aftermath of COVID. What was expected to be a continued strong recovery has been transformed into a stalling global economy with slower growth prospects and higher inflation. This is naturally denting the short-term demand prospects for dry bulk and has caused the markets to come under pressure and we do expect a soft start to 2023. Having said that, the inflation rate in the US slowed for the fourth month in a row in October and is now the lowest level since January. It eases the pressure on the US Federal Reserve to continue its policy of increasing interest rates to battle inflation. Also worth noticing is that China, for the first time since the pandemic began, has announced an easing of some of the COVID restrictions. In addition, extra measures to support the real estate and infrastructure sectors were announced last week. We expect that China will gradually reopen during 2023, which combined with stimulus will provide a boost to iron ore and steel demand. We are by no means out of the woods yet, and we do expect Q1, and most likely also part of Q2, to be challenging. However, with the historical low order book, as I will talk about on the next slide, combined with the comeback of the Chinese economy next year, we remain optimistic that the market will rebound strongly. Turning the attention to the supply side on slide 11, it is clear that the highly positive supply situation persists. As is well known, Golden Ocean is the largest listed owner of capes. In this segment, the order book is below 6%, which is a 30-year low. The already modest growth rate is before accounting for scrapping, so in other words, the net supply of cape-sized vessels will be lower, And with yards only taking orders for delivery end 2024, if you're lucky, or 2025, the order book is fixed for at least two years. Another reason for supply-side optimism is the commencement of the IMOD 2023 regulations, which will reduce the efficiency of the fleet as many vessels will be forced to slow down to comply. The effect of IMOD 2023 is hard to quantify. But all other things equal, it will require more vessels to move the same amount of cargo if the global fleet, on average, is slowing down. Naturally, with such an attractive supply side, the market does not need spectacular growth. Normalized demand growth would be enough to outpace the supply and create very strong supply-demand fundamentals for the drywall market. So putting supply and demand together, we expect an extended period of sustainable, healthy earnings. The world may be facing headwinds in terms of inflation and slowing economies, which means we are heading for a softer start to 2023. However, it is not enough to upset the long-term outlook for dry bulk, we believe. While we acknowledge macroeconomic factors, we do expect China to lift COVID restrictions next year, which will boost demand for dry bulk commodities, primarily iron ore. At the same time, we are looking at a historically low vessel supply situation and there's nothing that can change that in the short term, given the lack of shipyard capacity. Combined with inefficient coal and grain trades and the impact of IMO 2023 regulation, it is practically impossible to have a negative view on the supply side and it will support a strong freight environment in the years to come. As we have explained on previous calls, we always seek to secure fixed paid contracts when levels are attractive. And we do that in whatever segment, be it Cape or Panamax, that offers the best value. We do not want to be fully spot exposed at any time and we seek to take out fixed contracts in the best possible market conditions. For Q4, we have 75% of the fleet covered at fixed rates, averaging above $20,000 per day. That is $6,000 per day per vessel above the quarter to date benchmark rates. In other words, we are on track to beating the market significantly again this quarter. For Q1, we have 10% of our total fleet days covered. As it appears, we have focused on securing Panamax coverage rather than Cape coverage. simply because the Q1 pricing this year has been much more attractive for Panamaxes than for Capes. We always balance our commercial strategy between the two segments to extract maximum value at the lowest risk. On the last slide today, we will focus on cash flow generation. Through well-timed acquisitions, economies of scale, low G&A and access to competitive finance, we have achieved industry-low cash per given. And as it appears, GoldenOcean's cash flow potential is substantial. For instance, looking at the time charter equivalent rates we have achieved year-to-date, despite a challenging macro backdrop, would, on an analyzed basis, generate more than $400 million in free cash. This is a direct yield of 21% on today's share price. It's a broad decision what we do with future earnings, but with a strong balance sheet and a fully funded new building program, I believe it's a fair assumption that Golden Ocean will continue to have dividends on top of the priority list when it comes to capital allocation. Before opening up for questions, I'd like to shortly wrap up three main points from this release. Golden Ocean outperformed the market again in Q3 and delivered a solid net profit above 100 million. Despite a slowdown in the world economy and an expected slow start to 2023 for dry bulk, the 30-year low order book means that the fundamentals are in place for a strong rebound in freight rates. Golden Ocean continues to focus on returning capital to our shareholders. With the Q3 dividend, we have now paid almost $800 million since last year. And now we start the Q&A session. I therefore hand the word back to the operator. Thank you.

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 and 1 on your telephone. We are now taking the first question. The first question is from Greg Lewis from BTG. Please go ahead. Mr. Lewis, your line is open. If you wish to ask a question, please press star 1 and 1 on your telephone. Star 1 1 to ask a question.

We're taking now the question.

It's from the line of Homer McNaughton from Jefferies. Please go ahead.

Hi, thank you. Hey, guys. Good afternoon. I just have just a quick one for you on the buyback and return of capital to shareholders in general. You've declared a 35% dividend, and overall the buyback is a pretty sizable piece of the market cap, roughly 5%. Just in general, how are you thinking about that? You announced it in October. I'm sure there's blackout periods and whatnot and restrictions when you can use it, but have you put that capital to work yet, and how do you think about putting that capital currently given where the stock is in relation to NAV and then also in relation to your outlook as we go into 23?

Hi, Omar. Yeah, no, we have had blackout periods. since we announced it, so we haven't really been able to utilize it if we wanted to. When it comes to the share price, we haven't traded at a massive discount to NAVs following the announcement, so there has been some some support on the share price. But that is still part of the market that we're in, and AVs are always relative. But we announced in the buyback program that we will utilize it as part of our capital allocation strategy. while we continue to prioritize dividends as the main sort of source of allocation. We have a 12-month program in place and if we see value in buying back shares at a discount to NAV, we will of course take that opportunity and we do expect in line with our market outlook, that we will go into a weaker part of the year right now, and that will open up opportunities to buy back stock at effective prices.

Okay, yeah, understood. And then maybe just as a follow-up to that, as we get into this potentially weaker part of the market, we've seen some softness in second-hand values You clearly have critical mass across the capes in Panamax. You have a handful of new buildings also. So there doesn't seem to be a real need to go out and think about expansion. But do you think there are opportunities that are developing that you would look to maybe pick off a few shifts here and there if prices come in further?

Yes, it's the short answer. We will of course always monitor the market to see if there are attractive opportunities, whether that is buying or selling. On a more general note, we continue to find it attractive to diverse our older vessels. Despite a slight weakening of asset prices, they are still historically very high and we believe at the same time it's the right thing to do to focus on decarbonization and to modernizing the fleet and keeping our average age down. But naturally, we are always on the lookout for opportunities that create a shareholder value that are accretive. So if something comes along, we would look at it. This is in our DNA.

Yeah, definitely. Okay. Well, thank you. That's it for me. I'll turn it over.

Thank you. Thank you. Thank you for your question. We are now taking the next question. Hi, good morning.

Thanks for taking my question. On IMO 23, you have a relatively new fleet, but are there any vessels that could be adversely affected by new regulations? I know you said you're looking to divest some of the older fleet. And then beyond slow steaming, what could the impact be to the broader fleet in terms of retrofitting?

I didn't get the second part of the question, but maybe we can come back to that, then I'll just answer the first to begin with. So our average age is six years for the fleet, which obviously puts us in a very good position. Hello? Is my sound coming through?

Yep, I can hear you.

Oh, yeah, sorry. Okay. Yeah, and there's just a bit of noise. So the average age we have is very low. In addition, we have in the past 12 months or more invested quite heavily into the fleet and upgrades and digitalization. So our fleet average today would be a B rating on the CII. But of course, that's a theoretical rating. So in real life, it depends on how you utilize your fleet. And if your vessel is getting stuck somewhere in China for reasons outside your own control or the ship owner's control, you can still receive a lower score. But the point is that if you look at the fleet average, we have a very, very good starting point. So we are ready for IMO 2023. We do have, of course, some outliers in our fleet. We have some that are around 10 years old. They are not actually that old if you look at the rest of the fleet out there but for us they are older at least and some of these vessels will have to be EPL meaning that we will have to cap the top speed of the engine and of course that will give them less flexibility and that's also what I referred to when I spoke previously on the supply side optimism one of the can you say factors here is that there are a lot of vessels that are from 10 000 and 10 and and before that will have to cap their engines and obviously that means a less efficient fleet so we are we are we are not can you say we will have to do some some changes to our fleet but they are minimal compared to the effect that it will have on a on a on a fleet-wide basis on a global basis where where it will take out capacity which all our things equal should should aid the freight the freight environment in a positive way. So I think, I hope that was the answer to the first question.

Yeah, that was very helpful. The second part to it was just kind of beyond, like you say, your fleet is new, but beyond looking at the broader fleet, beyond slow steaming, what could the impact be in terms of, you know, could we see retrofits? Is there anything else that could drive utilization higher next year, just beyond shift capping their speed?

I mean, that will, Presumably, this is hard to quantify, but there will presumably be a number of ship owners out there that are doing what we are doing, which is to install energy saving devices. It could be new stock, which is It's a propeller vortex. It could be low friction paint. It could be other things. And these, can you say, upgrades can prolong dry dock stays. So that could give some, can you say, inefficiency gain, if you like, or at least, can you say, reduce the efficiency of the fleet. But I think the big, can you say, kicker here is All the vessels that are being slowed down, which is up to, I mean, some say that up to 70 to 75% of the global fleet is non-compliant with IMOD 2023, means a lot of vessels will have to reduce their speed. The big kicker comes only when the markets are strong, because in a weak market, the vessels are not full speeding anyways. So you have a situation where the moment that you reach a certain threshold on the rates, depending on your ship, then you'd want to speed it up and you can't. So you remove a flexibility in the fleet, which in my world means that you will have, can you say, higher highs because the normal situation is that there is an inherent flexibility in the fleet. So when rates increase and demand increases, then the fleet will start speeding up, which will, of course, can you say, will, of course, soften the market. But that possibility would be gone for a lot of vessels. So the real effect you will only see when the markets are becoming stronger. And then I would also like to add that this is being, can you say, gradually, IMOTO-23 has been gradually implemented over the course of 2023. So the full effect of this regulation will only really be present from 2020-2024. That's a really helpful color.

Thank you.

Thank you. Thank you for your question. There are no further questions at the moment.

Okay. In that case, we will say thank you very much for tuning in to GoldenOcean's third quarter release. You can always follow us on LinkedIn if you are in need of more information. And with that, I'll say thank you very much for the attention and have a good day.